Schumpeter: the founding father of innovation

Books, even libraries have been written about Schumpeter and his work. Joseph Alois Schumpeter is considered as the founding father of the academic fields of entrepreneurship and innovation.

Schumpeter was an Austrian economist, both in the sense that he was Austrian by birth, but also in the sense that he is considered an economist representing the ‘Austrian School of Economics’. In his writings and thoughts in innovation and entrepreneurship he did something that only the truly great thinkers can get away with: he formulated two different, even contradictory theories of innovation, knows as Schumpeter “Mark I” and Schumpeter “Mark II”.

Schumpeter “Mark I”, which he formulated in his early career is about the function of the entrepreneur. An entrepreneur is someone who makes new combinations of resources (“Neue Kombinationen”). It other words, the entrepreneur gathers a collection from the smallest dust particles in the economy, and puts them together to creating something unique. That can be something very limited, for example, a shoe polisher who find a unique street corner, to something very revolutionary, for example, putting some pieces of wood together to create a wheel. Innovation, says Schumpter “Mark I”, mainly comes from entrepreneurs creating new combinations.

Schumpeter “Mark II”, which he formulated later in his career, is about the function of the large enterprise. The large enterprise possesses the necessary resources and capabilities to develop innovations, introduce them into the market and make sure that customer adopt them. They can invest in R&D, they have marketing departments and the necessary distribution channels. Innovation, says Schumpeter “Mark II”, mainly comes from large enterprises.

References
Schumpeter, J. A. (1934) [1911]. The theory of economic development. Cambridge. MA: Harvard.
Schumpeter, J. A. (1942). Capitalism, socialism and democracy. New York: Harper & Brothers.

What is innovation?

According to the OECD (2005), innovation is “The implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organizational method in business practices, workplace organization or external relations.”

Innovation is different from discovery, which is the finding of a new and useful insights (e.g. Newton’s law).

Innovation is different from invention, which is the demonstration of new technical principle (e.g., blue LED, laser).

Innovation is different from diffusion, which is the adoption of an innovation by the customers or market.

Academically, there are two important discussion points in the definition:

1. Should it include implementation or not ? For example, is a patent that is developed but not used “innovation” or not? The consensus view is that, for something to be called an innovation, it must involve some kind of implementation, that is, it should be used in some way, or commercially exploited in any way.

2. Should it include “success” or not? For example, is a new product that fails immediately after introduction an “innovation” or not? The consensus view is that, for something to be called an innovation, it does not need to be successful. Be aware, however, that we often only measure “successful innovation”. If you check any top-100 innovation companies on the web. you’ll see that only successful companies are counted. Often, their “innovativeness” is even measured by their profitability or stock price! In addition, because failed innovations are often invisible (and companies do not like to publish about them), they are very difficult to measure.

References
OECD, Eurostat. (2005). Oslo Manual: guidelines for collecting and interpreting innovation data.

 

Why innovation?

There are three main reasons for companies to innovate.

First:  Not to die

A company, consisting of people and groups of people, is a social and a living system. Living systems needs to continuously renew themselves to keep living. If they do not, entropy will rise and eventually the systems will turn into a state of perfect equilibrium with its environment. It will no longer be distinguishable for its environment, and therefore it will be dead. To prevent this from happening, the system needs spend energy and renew itself to export entropy. Companies that fail to do so eventually go bankrupt, and break up into the smallest ‘dust particles’ of the economy: individual unemployed people, remaining stocks of products, remaining cash (or debts) and remaining pieces of infrastructure.

 

Second: To overtake others (or to remain the leader)

The wish to be a ‘market leader’ or at least in some way recognized as a leading company, is a strong socio-psychological urge in companies. A leading company has a unique problem: to remain the leader it can look at no other company in the market for examples. The moment it starts doing so, it is no longer the leader. To remain the leader, the company needs to re-invent reality and theory. To paraphrase Clausewitz: the genius is not the one who best applied available theory, but who, interaction with reality shapes new theory. The consequence of this it that a company that wants to become the leader needs to either wait for the leader to become tired of innovating, or to out-innovate the leader.

 

Third: to change the world (or the market, or whatever realm you define)

Until now I talked of ‘companies’. With this, I do not only mean ‘for-profits’. In fact, it applies to any kind of business organization, be it ‘for-profit’ or ‘not-for profit’, institutes, NGO’s, voluntary work organizations, etc. The goal of innovation is thus certainly not limited to sales and profits, but include any kind of impact on the world. The People-Planet-Profit framework shows three separate realms of impact: social impact (people), environmental impact (planet) and economic impact (profit). Each of these again break down in many impact metrics. Any organization that aims to create such impact will have to work hard to make the relevant changes happen, in other words, it needs to innovate.

 

References
Clausewitz, Carl Von (1832). On War.

Starting today

When is the best time to start a blog?

To paraphrase Seth Godin: the best time to start was 20 years ago. The second best time is today.

I will use this space to structure my thoughts and to ‘just write things down’.

As an academic for about 13 years now, I’m inhibited to ‘just writing things down’. Everything needs to be verified, annotated, referenced, nuanced and considered from at least three different angles. While academically sound, those principles kill speed and spontaneousness. They limit writing productivity. In the blog, I’ll still try to be as scientific as possible, when required, but not at the expense of ‘just getting it out’. I’m confident enough in my knowledge and expertise that it will turn out OK.

What will I use this space for?

  • thoughts on innovation, innovation management and innovation systems, in the broadest sense
  • thoughts on business and corporate strategy
  • thoughts on business ecosystems, networks and (technology) platforms
  • thoughts on education and research in general
  • linking to other blogs
  • showcasing work of my students
  • linking and showcasing work of colleagues
  • writing partial papers, both academic and practical
  • various thoughts, insofar as relevant in the public domain

Who am I?
I am Erik den Hartigh, currently an assistant professor of strategy and innovation management at Ozyegin University in Istanbul, Turkey. I am a teacher, I help people to realize their full potential. Undergraduate students, graduate students, PhD candidates, and anyone who may show interest in my topics. I am a researcher, I contribute to creating systematic knowledge in my field. I am open to connections with other fields, such as economics, sociology, biology and complexity.

Welcome / Hoş geldiniz